Some thoughts on leasing

“Leasing reduces the cost impact for acquisition because typically leasing does not require a down payment and because costs are spread over the life of the lease term.” –Mark Smith, general manager strategic consulting services, GE Capital Fleet Services

OK – leasing is a topic I’ve touched on in this space for time to time for a pretty simple, straightforward reason: the price increases for new trucks shows no sign of slowing down.

Obviously, emission mandates are a big component of the “sticker shock” fleets and individual buyers alike continue to experience. I mean, the retail price of a Class 8 daycab tractor is now firmly north of six figures, and with whole new batch of potential regulations aimed at governing greenhouse gas (GHG) emission and fuel economy on the near horizon, new truck sticker prices aren’t going into reverse anytime in the foreseeable future.

But does leasing make sense for your operation? Maybe – and maybe not. For that reason I talked with an expert in the field – Mark Smith (at right), general manager strategic consulting services for GE Capital Fleet Services – to get some thoughts on the lease versus buy decision.

One of the reasons leasing is more important today revolves around the cost to acquire assets. Talk about this in terms of trucking – how does the higher price of trucks due to new emission control technology factor into the lease vs. buy calculation?

Changes in emission technology have increased truck prices and related taxes. As a result for fleets not utilizing leasing to finance their trucks, the upfront costs associated with acquiring trucks have increased significantly. Leasing reduces the cost impact for acquisition because typically leasing does not require a down payment and because costs are spread over the life of the lease term. Thus the higher acquisition costs increase the benefits associated with leasing significantly.

What are the 'best' conditions for trucking fleets to lease equipment? Are there situations where buying is better?

In almost every situation leasing will be more cost effective than purchasing vehicles upfront. The benefit amount associated with leasing varies based on your cost of funds, the cost of the vehicle, the sales tax rate, the duration of the lease, how long you retain and utilize the asset, and the residual value. Leasing is effective and provides a financial benefit even for assets with long life cycles.

Is leasing something just large fleets can do? Can small fleets benefit?

The benefits of leasing are not limited to large fleets. In fact, smaller fleets may benefit even more because capital may not be as readily available. Assuming the cost of funds is the same, the benefit of leasing on a per unit basis will be the same as well.

What are the benefits to leasing trucks/trailers versus buying them?

Buying a truck or a trailer requires the purchase price and sales tax to be paid up front. Leasing allows you to pay for the trucks/trailers and taxes over time enabling your business to better align cash outflows (leasing payments) with cash inflows (revenue from operations). It also creates an additional credit facility dedicated to funding your trucks allowing you to retain existing capital for financing your core business operations and investments and allowing you to cycle your assets when needed versus when capital is available. TRAC (Terminal Rental Adjustment Clause) leases mirror the benefits of ownership and provide additional benefits not available under ownership.

Many fleets try to roll maintenance services into equipment leases – thus dubbing them 'full-service' leases. When is it a good idea to use full-service leases? Again, is this just for larger fleets or can small operators get them too?

Typically full-service leases are more expensive than TRAC leases because the lessor assumes the risk for not only the value of the vehicle at the end of the lease term but also for unplanned maintenance events. Typically full-service leases are used by companies who prefer to have set monthly payments for lease and maintenance expenses. They are available for both large and small fleets. Companies desiring to obtain the lowest cost of ownership typically utilize a TRAC lease combined with a managed maintenance program where actual expenses are passed through to the lessee.

For a fleet considering leasing, what information/data should they gather to make the leasing firm's job easier? What can the fleet do to speed up and simplify the leasing process?

Leasing companies will require audited financial statements. They will also need to know how many vehicles you intend to finance each year, the types of vehicles you require, any up-fitting costs, your desired amortization terms and OEM discounts. Fleets should engage leasing companies early in the process because they typically provide many value added services that will make the selection/engineering, ordering and up-fitting and delivery processes easier. They can also provide total cost of ownership modeling to help you select the best OEM/model for your specific applications. In addition, they have tools to help you model the benefits associated with leasing and build a business case that you can use to obtain senior management approval. Leasing companies can move very quickly when needed.

All good food for thought, as the saying goes, for those fleets trying to figure out whether they should buy or lease their next batch of new trucks.

And for those operators that believe buying trucks can be a better option, please send me your thoughts, too; for more information only helps everyone in the trucking space make better decisions.